Chipotle (CMG) stock is down over 24% from its 52-week high, and it may be time to buy the dip. Shares of the previously red-hot stock had started to drift lower this summer with the excitement over its stock split in the rearview mirror and as growth stocks cooled off in general. Then, news that highly-regarded CEO Brian Niccol was leaving the company to take charge at Starbucks (SBUX) compounded matters. The stock fell 7.5% on the day the news broke.
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However, with shares down considerably, the stock is worth a closer look. I’m bullish on Chipotle based on this more attractive entry point, the considerable long-term growth the company still has ahead of it, and the fact that it has been able to thrive while its restaurant peers are struggling. Plus, the departure of Niccol is certainly a blow, but the company should be fairly well-positioned to weather it. Lastly, sell-side analysts see considerable upside for the stock.
Not Cheap, But Looking More Attractive
The stock certainly isn’t cheap, trading at 48.1 times 2024 earnings estimates, although it is a lot cheaper than it was just a few weeks ago following the sell-off. The valuation also comes down a bit going into 2025, as the company is projected to earn $1.30 per share and trades at 40.5 times these estimates.
If look through the current malaise, there’s still a lot to like about the stock. First, it’s one of the few stocks in the industry that is growing sales and increasing traffic in what has been a tough operating environment for restaurants.
Many restaurants have reported slowing sales and declining traffic as consumers feel the pinch from inflation and cut back on discretionary spending such as eating out. But this hasn’t been the case with Chipotle, which has powered through these challenges.
For the second quarter, the company reported an impressive 8.7% increase in traffic and an outstanding 11.1% in same-store sales growth. For comparison, Starbucks, Niccol’s next port of call, reported a 3% decline in same-store sales during its most recent quarter.
This metric is important because it shows that sales are growing at Chipotle’s existing locations that have been open for at least one year, which bodes well for sustainable long-term growth. It also shows that Chipotle isn’t just growing by opening new stores while existing locations languish.
But on the subject of location growth, the outlook there still looks pretty good. The company plans on increasing its store count by 8-10% over the long term, with the eventual goal of getting to 7,000 restaurants. This would be nearly double its current footprint. So, while some investors may feel like they are late to the game with Chipotle, there is lots of growth potential ahead, and the current pullback creates an attractive entry point for this compelling long-term growth story.
In Good Hands
While the departure of Niccol is certainly a coup for Starbucks and a loss for Chiptole, it might not be as bad as it seems at first glance. Legendary investor Bill Ackman is a top 10 holder who owns 28.8 million shares of Chipotle. He wrote, “While we are disappointed to see Brian go, one of the measures of a great CEO is the company that he leaves behind… Brian has built an extraordinary team at Chipotle that we expect will not lose a step in his departure.”
Ackman is right that a great CEO cultivates a strong bench. And one part of that strong bench is new interim CEO Scott Boatwright, who previously served as COO. While we don’t know if Boatwright will get the job on a permanent basis, I like this appointment. Many of Chipotle’s recent improvements have come on the operational front, such as its mobile ordering system and the addition of “Chipotlanes.”
Customers use the app to order ahead of time and then pick up their order at designated times using the Chipotlanes, speeding up wait times (a major pain point for many drive-throughs) and increasing throughput. Only 24% of Chipotle locations currently have drive-throughs, so this is a potential area for further growth and improvement.
It remains to be seen what happens next, but it does seem like Niccol left the company in capable hands.
Is CMG Stock a Buy, According to Analysts?
Turning to Wall Street, CMG earns a Moderate Buy consensus rating based on 17 Buys, nine Holds, and zero Sell ratings assigned in the past three months. The average CMG stock price target of $63.05 implies 19.8% upside potential from current levels.
Looking Ahead
I’m bullish on Chipotle based on the substantial growth it still has ahead of it. Also, while the stock still isn’t cheap, it has certainly gotten cheaper and could continue to grow into its valuation as it continues to grow its earnings. Additionally, the stock has continued to post impressive numbers at a time when other restaurants have struggled with inflation and other challenges.
And while Niccol leaving likely wasn’t the news many investors wanted to hear, the company looks well-positioned to succeed after his departure, and investors like Bill Ackman are confident that Niccol left the company in strong shape with Boatwright in charge.
